COMPANY UPDATE Amit Agarwal agarwal.amit@kotak.com +91 22 6218 6439 VRL LOGISTICS LTD PRICE: RS.366 RECOMMENDATION: BUY TARGET PRICE: RS.450 FY19E PE: 21.6X Set to meet future needs VRL has reported a very strong Q1FY18 and we expect the trend to continue in future quarters as well. We estimate volume trend to improve for VRL in the logistics with shift of volumes from the unorganized segment post GST implementation. While the bus segment is set to expand and grow under the Amended Motor vehicle Act. Outlook also remains strong with factors like: 1) Government initiatives to improve road infra; 2) Effective management of fuel cost; 3) Effective internal control systems; 4) a strong Management team and 5) Healthy estimated GDP growth. Maintain BUY with an unchanged TP of Rs 450 valued at 26x FY19E earnings. Summary table (Rs mn) FY17 FY18E FY19E Sales 18,030 20,180 23,180 Growth (%) 4.4 11.9 14.9 EBITDA 2,179 2,967 3,472 EBITDA margin (%) 12.1 14.7 15.0 PBT 1,080 1,861 2,315 Net profit 728 1,247 1,551 EPS (Rs) 8.0 13.7 17.0 Growth (%) -39.2 71.3 24.4 CEPS (Rs) 18.4 25.1 29.1 Book value (Rs/share) 59.3 65.9 75.8 Dividend/share (Rs) 5.0 6.0 6.0 ROE (%) 13.5 20.8 22.4 ROCE (%) 21.5 28.6 31.1 Net cash (debt) (348) (666) (513) Net WC (Days) 7.7 12.8 16.7 EV/EBITDA (x) 15.6 11.5 9.8 P/E (x) 46.1 26.9 21.6 P/Cash Earnings 20.0 14.7 12.7 P/BV (x) 6.2 5.6 4.9 Source: Company, Kotak Securities Private Client Research VRL is getting GST prepared With implementation of GST, we could see manufacturers completely outsourcing the supply chain logistics to large fleet operators, who could manage large scale operations for them along with proper paper work for input tax credit. We believe GST will lead to a shift of cargo movement to tax-compliant large-fleet operators. Unorganized players would not be able to provide the required logistics network and maintain technology and paper work demanded by the big manufacturers. Here we may see, significant amount of businesses getting shifted to organized players like VR which has already made significant investment in hub-and-spoke network, owned truck base and created a driver base. Management of VRL here indicated that the company has already started receiving inquiries from bigger clients for logistical support post GST implementation for bigger warehouses and bigger trucks and VRL is gearing up accordingly for the same. Table Highlight Shift to bigger and less number of warehouses No check- post Taxation change Business opportunity Remark Lead to hub and spoke model, to benefit VRL Lower turnaround time for trucks Improved utilization of trucks Requirement of lesser number of trucks Minimum change in tax outflow Increase in compliance may lead to business moving from unorganized to organized sector Source: Companies, Kotak E- Way bill would ensure compliance with GST E-way bill (to be introduced from Oct 1st, 2017) is an electronic way bill for movement of goods which can be generated on the GST Network (common portal). Under GST, transporters or supplier will need to generate and carry an electronic waybill or E-Way Bill when moving goods worth Rs 50,000 or more from one place to another. This will have to be verified by the receiver of such goods. When an e-way bill is generated a unique e-way bill number (EBN) is allocated and is available to the supplier, recipient, and the transporter for tax compliance. E-way bill vs. old system Particular Under VAT Under GST - E way bill Interstate movement of good Restricted Free movement Physical verification of goods Regular Not required Malpractice and evasion Regular Highly unlikely Distance covered by trucks per day 300 kms 600 kms estimated Source: Industry, Kotak Securities Private Client Research Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 2
One of the major reasons that transports and traders are concerned is the strict timelines for validity of e-way bills, especially with low average speed of 25 kms per hour for trucks in the country. Besides, truck industry is very fragmented and rid with theft and driver downtime. E-way bills for different distances Distance Valid for Less than 100 kms 1 day 100 kms to 300 kms 3 days 300 kms to 500 kms 5 days 500 kms to 1000 kms 10 days 1000 kms or more 15 days Source: Industry, Kotak Securities Private Client Research We expect E-way Bill to provide organized truck fleet operators a level playing field with unorganized players by ensuring 100% tax compliance. Motor vehicle Bill makes headway The Motor Vehicles (Amendment) Bill has finally made some headway with the Lok-Sabha passing the bill in April 2017. We expect the bill to be passed in the Rajya Sabha by the end of the winter session. Motor Vehicle Amendment Act proposes a unified vehicle registration system and a simplified system of vehicular and transport permits. This is estimated to significantly improve operating efficiencies and reduce operational costs for the passenger transportation business (bus segment) of VRL by reducing various operational hurdles relating to inter-state transportation of passengers, and simplifying the regulatory framework around vehicle permits and driver licenses VRL and Motor Vehicle Amendment Act Highlight Remark Unified vehicle registration system Organized framework Simplified license norms Source: Industry, Kotak Secuities Private client Research Removal of inter- state hurdles in bus service Opportunity to expand bus service PAN India Favors VRL over unorganized players Easier for VRL to hire and retain drivers Capex to align with GST Management of VRL indicated the company has most of the infrastructure in place to cater to the changing requirement of clients in the medium term, The next phase of capex would be now primarily towards purchase of larger and modern trucks, new Volvo buses and expansion of hubs. The upcoming capex would be in sync with the requirement mandated by GST in FY18 and FY19. We estimate the company to spend around Rs 1 bn per annum over FY17 to FY20E as capex. Improvement in performance going forward We estimate that the various legislative changes like GST Act, Motor Vehicle Amendment Act and Scrappage policy to yield benefits for VRL from FY19 with benefits increasing further in FY20/FY21. Healthy GDP growth, improvement in trade and various road infra projects of the government would further add to the growth of the company. For VRL we expect, Improvement in tonnage in the trucking segment with enhanced client base Improvement in occupancy in the bus segment with improved geographical reach Operating leverage to play-out which would lead to improvement in margins and return ratios Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 3
We recommend BUY on VRL Logistics Ltd with a price target of Rs.450 Valuation and Outlook We see VRL as a Logistics player which has created a niche for itself in the transport industry and a player who has overcome the nuances of the industry through effective practices within the company. This has enabled the company to outperform its peers in every financial parameter. The GST Act and Motor Vehicle Act is expected to improve business prospects of the company with full benefits accruing from FY19E. We estimate strong earnings growth in medium term for the company with improvement in EBIDTA margins and return ratios. Maintain BUY with an unchanged TP of Rs 450 valued at 26x FY19E earnings. Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 4
RATING SCALE Definitions of ratings BUY We expect the stock to deliver more than 12% returns over the next 9 months ACCUMULATE We expect the stock to deliver 5% - 12% returns over the next 9 months REDUCE We expect the stock to deliver 0% - 5% returns over the next 9 months SELL We expect the stock to deliver negative returns over the next 9 months NR Not Rated. Kotak Securities is not assigning any rating or price target to the stock. The report has been prepared for information purposes only. RS Rating Suspended. Kotak Securities has suspended the investment rating and price target for this stock, either because there is not a Sufficient fundamental basis for determining, or there are legal, regulatory or policy constraints around publishing, an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied upon. NA Not Available or Not Applicable. The information is not available for display or is not applicable NM Not Meaningful. The information is not meaningful and is therefore excluded. NOTE Our target prices are with a 9-month perspective. Returns stated in the rating scale are our internal benchmark. FUNDAMENTAL RESEARCH TEAM Sanjeev Zarbade Ruchir Khare Amit Agarwal Nipun Gupta K. Kathirvelu Capital Goods, Engineering Capital Goods, Engineering Logistics, Paints, Transportation Information Technology Production sanjeev.zarbade@kotak.com ruchir.khare@kotak.com agarwal.amit@kotak.com nipun.gupta@kotak.com k.kathirvelu@kotak.com +91 22 6218 6424 +91 22 6218 6431 +91 22 6218 6439 +91 22 6218 6433 +91 22 6218 6427 Teena Virmani Ritwik Rai Jatin Damania Jayesh Kumar Construction, Cement FMCG, Media Metals & Mining Economy teena.virmani@kotak.com ritwik.rai@kotak.com jatin.damania@kotak.com kumar.jayesh@kotak.com +91 22 6218 6432 +91 22 6218 6426 +91 22 6218 6440 +91 22 6218 5373 Arun Agarwal Sumit Pokharna Pankaj Kumar Ashini Shah Auto & Auto Ancillary Oil and Gas Midcap Midcap arun.agarwal@kotak.com sumit.pokharna@kotak.com pankajr.kumar@kotak.com ashini.shah@kotak.com +91 22 6218 6443 +91 22 6218 6438 +91 22 6218 6434 +91 22 6218 5438 TECHNICAL RESEARCH TEAM Shrikant Chouhan Amol Athawale shrikant.chouhan@kotak.com amol.athawale@kotak.com 91 22 6218 5408 +91 20 6620 3350 DERIVATIVES RESEARCH TEAM Sahaj Agrawal Malay Gandhi Prashanth Lalu Prasenjit Biswas sahaj.agrawal@kotak.com malay.gandhi@kotak.com prashanth.lalu@kotak.com prasenjit.biswas@kotak.com +91 79 6607 2231 +91 22 6218 6420 +91 22 6218 5497 +91 33 6625 9810 Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 6
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